The distortions at the heart of our financial system

By David James

The policy in the federal budget to remove negative gearing and the 50 per cent reduction in capital gains tax after an asset is held for more than a year is a move to start reducing the massive distortion at the heart of Australia’s financial system. This distortion has split the society between older people, who bought homes when they were comparatively cheap, and younger people, who are either burdened with lifetime debt or cannot afford to be home owners.

It will not happen quickly and may be reversed if the coalition gets into power. But, given that about a year ago Australian property reached valuation levels comparable to the peak of Japan’s 1989 property bubble (relative to GDP), it was hard to avoid the conclusion that something had to be done.

Read the full article